Budgeting What to Do With Your Tax Refund Make your tax refund work for you By Paula Pant Paula Pant Facebook Twitter Paula Pant is an expert on retirement planning, financial planning, debt management, and budgeting who speaks and writes regularly on personal finance subjects. She graduated magna cum laude from the University of Colorado at Boulder and is a real estate investor with multiple rental properties. learn about our editorial policies Updated on December 25, 2021 Reviewed by JeFreda R. Brown Reviewed by JeFreda R. Brown Facebook Instagram Twitter JeFreda R. Brown is a financial consultant, Certified Financial Education Instructor, and researcher who has assisted thousands of clients over a more than two-decade career. She is the CEO of Xaris Financial Enterprises and a course facilitator for Cornell University. learn about our financial review board Fact checked by Emily Ernsberger Fact checked by Emily Ernsberger Twitter Emily Ernsberger is a fact-checker and award-winning former newspaper reporter with experience covering local government and court cases. She also served as an editor for a weekly print publication. Her stint as a legal assistant at a law firm equipped her to track down legal, policy and financial information. learn about our editorial policies Share Tweet Pin Email In This Article View All In This Article Pay Down Debt Save for College Build Your Emergency Fund Invest for Retirement Start a Side Business The Bottom Line Photo: Sam Edwards / Getty Images It's always exciting when tax refund time comes around. If your deductions earned you a nice chunk of cash back, why not put it to work? There are dozens of smart ways to handle your tax refund. Consider using your tax refund to pay down your debt, save for college, invest, or start a side business. Here are just a few things you can do with your tax refund to make the most of it. Pay Down Debt There are two ways you can pay down your debt—either apply your tax refund toward the debt with the highest interest rate or apply your tax refund toward the debt with the smallest balance. Paying off your highest-interest-rate debt will save you the most money, but paying off the smallest balance might provide the psychological sense of victory that keeps you motivated to continue paying down your debts. Which of these two popular debt payoff methods you use is up to you. Either way, if you're struggling with a mountain of debt, you can use your tax refund to accelerate the climb. Save for College You can invest the entire tax refund as a lump sum in a 529 College Savings Plan that you’ve set up for yourself, your child, or a family member. You can also stick the refund into a special savings account that you’ve designated for expenses you’ll incur during your student years that may not be 529-eligible, such as the cost of paying for car insurance. Note Contributions to a 529 plan are tax-deductible in many states (though not at the federal level). That means if you invest your tax refund into a 529 plan, it may lower your taxable state income next year. Check out your state's current 529 tax laws to be sure. Build Your Emergency Fund This is probably the single most important thing you can do to maintain strong financial health and prevent yourself from sliding into debt. Your emergency fund should contain three to six months of living expenses and should be held in an easily accessible, liquid account, such as a savings account or a money market account. You could use a big tax refund to shave months off of your emergency savings plan and put yourself in a better position to weather future financial storms. Invest for Retirement Speaking of taxes, why not use your tax refund to reduce your future tax bill? In 2022 you can contribute $20,500 of your paycheck per year to your 401(k) if you’re 49 or younger (up from $19,500 in 2021), and an additional $6,500 if you’re 50 or older. Note All 401(k) contributions are made on a pre-tax basis, so you won't pay taxes on that money until you withdraw funds in retirement. Alternatively, you can contribute $6,000 to your Roth IRA if you’re 49 or younger, or $7,000 if you’re 50-plus. This applies in 2021 and 2022. Not everyone is eligible to contribute to a Roth IRA, though. The eligibility is dependent on your income and your marital filing status. In 2022, a married couple filing jointly can make a full contribution if their earned income is $204,000 or less (up from $198,000 in 2021). A single filer can make a full contribution if their earned income is $129,000 or less (up from $125,000 in 2021). Beyond those income levels, the amount that you’re able to contribute gradually diminishes until you cross a threshold, after which you can’t contribute to a Roth IRA at all. Start a Side Business The adage “it takes money to make money” is true. Blindly throwing money at a business is a bad plan, but strategically investing in a side business might earn you solid rewards down the road. You can invest your tax refund in the supplies you’d need to start selling jewelry or reupholstering furniture. Or you could register a website and start selling products online. You can even buy a lawnmower or a leaf-blower and start a weekend business doing neighborhood yard maintenance. Alternatively, consider saving for a down payment on a rental property. Take some time to consider what you're good at—and what you could launch with just the funds from your tax refund. The Bottom Line Don’t run to the nearest shopping mall with your tax refund—use it to improve your financial future. You worked hard for that tax refund. Now it’s time to make your refund work for you. And once you have put that refund to good use, think about how you can avoid getting a tax refund in the first place next year. That way, you can put that money to work right away. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Finaid. "State Section 529 Deductions." Internal Revenue Service. "Topic No. 313 Qualified Tuition Programs (QTPs)." Internal Revenue Service. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits." Internal Revenue Service. "401(k) Plan Overview." Internal Revenue Service. "Retirement Topics - IRA Contribution Limits." Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2022." Internal Revenue Service. "Amount of Roth IRA Contributions That You Can Make for 2021."